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If you have ever run a company, you will know that life throws all sorts of curveballs at you. If you haven’t been your own boss but are aiming to be, then it pays to be prepared.
The importance of life insurance for business owners only becomes clear when the worst happens.
In this article, we cover:
- What types of business insurance are available?
- How could inflation impact some levels of cover?
- Do I need to consider life insurance as a small business owner?
- Do self-employed people need to consider life insurance?
Related content: How to start a business
What types of business insurance are available?
All the best-known insurance brands – from Aviva, to AIG, to Royal London – offer some form of business life cover. So it’s worth shopping around to find the best deals and ensure you are not paying over the odds.
There are dozens of types of business insurance to wrap your head around, but the essential ones are listed below.
Shareholder protection insurance
Shareholder protection insurance is also known as “ownership protection”. This is where a crucial person in a business – for example, a partner or the controlling shareholder – takes out a policy that reflects the value of their shares.
This type of policy is designed for partnerships, Limited Liability Partnerships and limited companies, but not public companies where there can be thousands or millions of shareholders.
It’s not a nice thing to have to think about. But if a key person were to die, or to be incapacitated by illness, rivals or hostile parties could swoop in and buy up their shares with the intention of taking over the business or stripping it for assets.
Shareholder protection insurance sets up policies to provide the other key shareholders in the business with the funds they need to buy those vital shares, ensuring business stability and continuity.
Employee insurance benefits
Attracting and retaining talented staff is a full-time job for most businesses. That’s where employee benefits come in.
If, for example, owners are able to remove some of the stress and additional hassles that workers face by sorting out life insurance for them, it can be an appealing benefit to keep them with the company.
A survey from Simplyhealth found that almost three-quarters of UK employees receive no workplace perks to help them manage their health. That’s despite strong employee benefits being among the biggest job attractions for potential recruits.
Some of the most-requested freebies include eyecare, occupational sick pay and dental cover, along with remote or flexible working policies.
While free food and a gym membership are among the most commonly offered employee benefits, they might not actually be the draw that business owners expect.
Far more employees want their company to sort out complex and costly personal health, dental or optical insurance, according to a recent employee benefits survey.
The same research found that a staggering 88% of people would give a lower-paying job with great health benefits consideration when choosing between that and a higher-salaried position without the same benefits.
Key person insurance
Key person insurance covers those superstar staff without whom a business can’t function properly. It pays out if they die or are unable to work because of illness or injury, or if they are diagnosed with a critical condition.
In a pharmaceutical company, this might be the lead scientist, for example.
The premiums you have to pay on a weekly or monthly basis are worked out by calculating precisely how profitable the key person is for the business.
Determining a worker’s value can be difficult. But in the event that you lose a vital member of staff, key person insurance can be the difference between continuing to trade and having to dissolve your business.
Business loan protection
This is also known as business protection insurance and can cover repayments required on various forms of debt.
Sometimes when cashflow is tight or a supplier or client fails to pay on time (a common issue for all small businesses), business loan protection can be the difference between a company’s survival and it going under.
Cover can include:
- Directors’ loans
- Commercial loans and mortgages
- Venture capital loans
- Overdrafts
- Credit cards
- Personal guarantees
Relevant life insurance
Relevant life insurance is a kind of policy that business owners can take out to provide the cover for an individual employee.
It’s a good start to any benefits package for smaller businesses.
Index-linked increasing cover
This type of insurance has premiums that increase annually in line with changes to the retail price Index (RPI) measure of the inflation rate. The RPI in the UK in the year to December 2022 was 13.4%, according to the Office for National Statistics.
The RPI measure of inflation, like the consumer prices index, draws on the price changes in a basket of goods and services. But unlike the CPI, it also takes account of mortgage interest payments.
We know that inflation reduces the purchasing power of our money. And it’s the same with a fixed final payout sum: £250,000 today won’t be worth £250,000 in future because price inflation eats away at money’s value over time.
The Bank of England has its own calculator where you can plug in your own figures to find out more.
By index-linking your cover, you can ensure that it won’t lose its value over time – a critical consideration in company life insurance. However, your premiums will go up as your sum assured increases.
Fixed increasing cover
Increasing term life insurance is a type of life policy where the payout increases the longer you hold the policy.
The cover can be set to track changes in the RPI rate of inflation. But you can also arrange for the payout to increase by a fixed amount each year – and again the premiums will rise.
These are policies most often used for large estates where the payout is expected to be high. Fixed increasing cover may also be useful as an offsetting tool for those with substantial estates who are expecting to pay out sizeable amounts of inheritance tax.
Inheritance tax bills can come as a terrible shock, as they are presented when families are already dealing with a bereavement.
Planning in advance can help to smooth over the administrative pressures that come with a death. It also ensures that a family doesn’t have another nightmare to face while they’re grieving.
Find out more: How can I reduce my inheritance tax bill?
Level cover
Level cover, or level-term life insurance, provides a fixed lump sum if the policyholder passes away within the term that’s agreed in the policy.
Be aware that the fixed sum won’t increase in line with inflation, and neither will your premiums.
So why choose level cover? If you’re seeking life insurance that only lasts a short time, or uses small amounts of money, inflation may not have a noticeable effect on your final payout.
It’s most often used to secure a specific amount of money. For example, for school fees, bank debts or interest-only mortgages.
With repayment mortgages, a common option is decreasing term life insurance. This is where both the payouts and the premiums fall over time as the outstanding debt comes down.
Find out more: How does mortgage life insurance work?
Do small business owners need to consider life insurance?
In a word, yes. Each of the above policies can be extremely beneficial to small business owners.
Group life cover is probably one of the first places business owners look when they’re seeking insurance.
Also known as “death-in-service benefit”, it is a type of insurance that employers can offer their workers. A sum worth up to four times their salary is paid to chosen beneficiaries if they die while on the company’s payroll.
It is one of the most important kinds of cover an employer can provide, as it allows them to support the family of a valued staff member at the most difficult time with a lump-sum benefit.
Cover options vary but are often available to companies of only three people up, so even the smallest businesses can benefit.
Sometimes, insurance policies also can be claimed as a legitimate business expense and are therefore tax deductible.
It’s worth checking with your accountant precisely which life insurance policies can be claimed as an allowable expense.
Some business life insurance policies can even help mitigate inheritance tax (IHT), which makes planning for the future much simpler.
The IHT threshold is £325,000. HMRC takes 40% tax on assets over that value when they are passed on after death. For married couples that threshold is doubled.
When other tax breaks are added, heirs normally only pay 40% IHT on an estate that’s worth £1m or more.
Life insurance is a common tool for these richer folk to have enough cash to cover this tax bill.
What about life insurance for self-employed people?
The number of self-employed people in the UK continues to rise. And yet many do not take out insurance to protect themselves should life get in the way.
The self-employed may not get the same standard protections and benefits that employees receive, such as holiday pay or sick pay.
So if you can’t work because you are ill, or you have been involved in an accident, it could have a devastating effect on your and your family’s finances.
Life insurance for self-employed people extends to areas such as:
These provide security for a policyholder if they can’t carry out their job due to an unexpected illness, injury, accident or being made redundant through no fault of their own.
Usually, relevant life cover and key person insurance are tax deductible as they are taken out through the business. Personal life insurance will likely not be an allowable expense.
These options are key to helping self-employed people protect their livelihood and ensure they can continue to live and work successfully even if the unexpected happens.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
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